The Investment Column: Balfour Beatty has growth prospects that justify its rating

Oxonica; AT Comms
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Our view: Buy

Share price: 363p (+10.75p)

Balfour Beatty has done very well out of the Government's private finance initiative (PFI) scheme over the years. Yesterday, Ian Tyler, the construction group's chief executive, assured the City that PFI is going to continue to be a key part of the Government's procurement programme for a good time to come.

And it seems that the PFI model is catching on abroad. Mr Tyler revealed that Balfour Beatty is looking at bidding for a number of projects in Asia, Europe and the US. Across the Atlantic, California, Texas and Virginia are all planning a number infrastructure projects along PFI lines. This is also the case in Hong Kong and Singapore. Given its vast experience of PFI schemes in Britain, Balfour Beatty should be well placed to cash in on this trend abroad.

Meanwhile, the group continues to do very well with its core UK construction and engineering operation. Yesterday it posted a 15 per cent rise in first-half profits before exceptional items to £60m. There was also news that the group's order book had hit a record £8.8bn. Of vital importance when analysing construction companies is looking at their ability to turn contract wins into actual cash. On this front, Balfour scores well. At the end of 2005, it had £315m of cash in the bank. By July of this year, this figure had risen to £353m, despite the group having made £20m worth of acquisitions.

Balfour Beatty, which builds railways, schools and hospitals, is the single biggest contractor working on the Heathrow Terminal 5 development at present. Along with Amec and the US group Jacobs, it hopes to win the contract to manage the site where the London 2012 Olympics are to be held. Although Balfour's consortium faces stiff competition, the project is expected to be worth hundreds of millions of pounds and well worth the fight.

Trading at nearly 14 times forward earnings, the group's shares stand at a premium to the wider sector. However, for a quality operator such as Balfour Beatty this is not expensive.


Our view: Worth a punt

Share price: 127.5p (+17.5p)

The intellectual property group Oxonica was spun out of Oxford University in 1999 and floated last year. It has developed two commercial products and yesterday came news of a key deal for one of them which analysts believe will be worth up to $13m (£7m) for the company. It will see Oxonica supply Turkey's national oil company with its Envirox fuel additive, which not only increases diesel fuel efficiency by 10 per cent, but also cuts carbon dioxide emissions.

The agreement with Petrol Olfisi is the first for Envirox and is clearly a clever move given the number of older diesel vehicles in this part of the world. It will see the Turkish company mix the fuel additive with its diesel and distribute it to network of 3,300 filling stations.

Oxonica has also developed a next-generation sun protection formula which boasts anti-ageing properties. Optisol was launched last year by the group and has already been incorporated by Boots into some of its Soltan sunscreen range. The markets Oxonica addresses with both Envirox and Optisol are significant in size. The near-term performance of the shares very much depends on the group winning more deals like that unveiled yesterday. The timing of such agreement is difficult to predict so investors should be prepared for volatility in the stock. Nevertheless, it is worth a punt.

AT Comms

Our view: Buy

Share price: 49p (+0.5p)

AT Communication, named after founder and chief executive Alex Tupman, has agreed to buy rival Rocom, so called as its founder is Robert Old. Both have done well out of the tie-up. Mr Old is set to walk away from the business more than £17m richer while Mr Tupman has doubled AT's revenues by making the deal, its fourth since listing on AIM in July last year.

AT is to businesses what Carphone Warehouse is to consumers. It acts as a middleman satisfying the telecoms needs of corporations. The group works with partners, including BT and a host of hardware suppliers, to offer bespoke telecoms packages to a range of customers. A typical deal would be with a high street retailer to move internal calls on to an internet-based network, thus slashing costs for the customer. The Rocom deal adds 30,000 customers to its base, providing significant cross-selling opportunities. More important, it strengthens AT's sales channel and will be immediately earnings enhancing.

AT also reported strong first-half results yesterday with revenue more than doubling to £15.9m while profit before tax shot up to £1.3m from £0.2m.

Based on the forecasts of the house broker Daniel Stewart, AT trades at 7.1 times 2006 earnings - a discount to sector rivals such as Alternative Networks and Maintel. With momentum in its favour, AT looks a good bet.